Obagi Bidding War Seen Pushing Premium to 99%: Real M&A

Obagi Bidding War Seen Pushing Premium as High as 99%
Valeant Pharmaceuticals International Inc. signage is displayed outside of the company's headquarters in Mississauga, Ontario. On March 20, Montreal-based Valeant said it agreed to buy Obagi for $19.75 a share in cash, a 40 percent premium to its 20-day average stock price before the announcement. Photographer: Norm Betts/Bloomberg

Traders are betting that a bidding war for anti-aging cream maker Obagi Medical Products Inc. isn’t over yet.

The producer of prescription skincare products rose to $25.44 yesterday, 6 percent above a sweetened $24-per-share proposal from Valeant Pharmaceuticals International Inc. That stock increase signals investors expect closely held Merz Pharma Group to come back with a higher offer after the German company said this week it’s “resolute” in its aim to buy Long Beach, California-based Obagi, according to Cuttone & Co.

Valeant’s latest bid is already 70 percent more than Obagi’s average 20-day stock price before the takeover fight began, the highest premium for a U.S. drug-industry deal in four years, according to data compiled by Bloomberg. Valeant could be willing to pay as much as $28 a share to top any new offer from Merz, said Royal Bank of Canada, pushing the premium as high as 99 percent.

Merz “is not done,” Sachin Shah, a New York-based special situations and merger arbitrage strategist at Cuttone, said in a telephone interview. For Valeant, “they know what their top or ceiling offer is and, for me, it’s probably not $24. Now they’re just going to have to wait and see what Merz does.”

Kenny Juarez, a spokesman for Obagi, declined to comment beyond the company’s April 3 statement that its board had unanimously approved the latest offer from Valeant.

Obagi’s skincare products include Nu-Derm, which made up 52 percent of its $121 million in sales last year, and wrinkle reducer Elastiderm.

Activist Push

The company, which went public in 2006, has faced pressure to sell itself since activist investor Voce Capital Management LLC acquired shares and last year criticized the board’s unwillingness to consider offers.

On March 20, Montreal-based Valeant said it agreed to buy Obagi for $19.75 a share in cash, a 40 percent premium to its 20-day average stock price before the announcement.

Merz, which said it had been holding takeover discussions with Obagi at the time Valeant’s proposal was disclosed, countered with a $22-a-share cash bid on April 2. Valeant then boosted its offer to $24 a share a day later, valuing Obagi at $418 million.

The latest deal price represents a 70 percent premium to Obagi’s unaffected shares, the biggest for a U.S. pharmaceutical deal valued at more than $250 million since 2009, according to data compiled by Bloomberg.

‘It’s On’

Shares of Obagi have traded above Valeant’s offer since it was announced two days ago, closing yesterday at record high of $25.44.

Today, Obagi shares fell 2 cents to $25.42.

Investors are “betting that the other team could come back,” Keith Moore, an event-driven strategist at MKM Partners LLC in New York, said of Merz.

Merz, the Frankfurt-based maker of Mederma scar cream, said this week when announcing its counterbid that it was surprised by Obagi’s agreement with Valeant given the ongoing negotiations and remained “resolute” in its efforts to acquire the company.

“When someone says ‘resolute,’ to me, that means it’s on,” Shah said. He estimated the German drugmaker would need to boost its bid to at least $25.25 a share to get the Obagi board to consider it.

Representatives for Merz didn’t immediately respond to phone messages or an e-mail seeking comment.

Cost Savings

Acquiring Obagi would give both Valeant and Merz the chance to trim costs by integrating the company’s products with their existing lines of skin treatments and wrinkle creams, according to David Amsellem, an analyst at Piper Jaffray Cos.

“Both Merz and Valeant have infrastructure in the aesthetic space,” Amsellem said in a phone interview from New York. “You can basically take a bludgeon to Obagi’s costs.”

Given annual cost savings that may even exceed the $40 million projected by Valeant, the company has room to increase its own bid for Obagi if needed to fend off a sweetened offer from Merz, Amsellem said.

Valeant’s swift response to the Merz bid signaled that management was prepared to fight for Obagi, Douglas Miehm, a Toronto-based analyst at RBC, wrote in an April 3 note to clients. Valeant could be willing to pay as much as $28 a share, a 99 percent premium that would imply a multiple of about 4 times Obagi’s sales, Miehm wrote.

Laurie Little, a spokeswoman for Valeant, didn’t immediately respond to a phone message or e-mail seeking comment.

Deal History

While Valeant has said it typically prefers to pay no more than 2.5 times sales in a deal, that hasn’t stopped it from offering higher multiples before, according to Miehm.

When the company purchased Aton Pharma Inc. in 2010, the price tag represented a multiple of about 3.5 times sales, while a deal for Lithuanian drugmaker AB Sanitas in 2011 carried a multiple of about 3.6 times sales, he said.

Still, Valeant also has a history of walking away from takeover fights. The company dropped a hostile bid for Cephalon Inc. in 2011 after its $5.7 billion offer was topped by Teva Pharmaceutical Industries Ltd.

“They don’t like getting involved in bidding wars,” Raghuram Selvaraju, a New York-based analyst at Aegis Capital Corp., said in a phone interview. “They specifically structure their M&A strategy to avoid getting involved in a bidding war. If Merz comes back and tops their bid, they’re going to say, ‘I’m out.’”

Valeant may be more willing to increase its offer this time because of the potential cost savings and profitability boost tied to integrating Obagi’s products, Shah said.

“The reason why they are going to continue to participate in this essentially public auction or bidding process versus when they haven’t in the past is because they know that it’s still accretive,” he said. “The valuation is extremely compelling.”

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